UPDATE 3-EU looking at how to stop Islamic State oil sales from Syria

* Some fear arms will fall into hands of Islamic State (Recasts with debate on oil sanctions)

By Adrian Croft

BRUSSELS, Aug 13 (Reuters) - The European Union is looking into how it could tighten sanctions to stop Islamic State militants from selling oil from fields they have overrun in Syria, a European diplomat said on Wednesday.

The issue could come up at an emergency meeting of EU foreign ministers called for Friday to discuss the humanitarian and security crisis in Iraq, where Islamic State fighters have made startling gains.

Islamic State is selling crude oil and gasoline to finance their newly declared "caliphate" after seizing oil fields in both Iraq and Syria.

The EU banned imports of Syrian oil in 2011 to intensify pressure on President Bashar al-Assad's government over its suppression of unrest. But in April 2013, it eased sanctions to allow purchases of oil from the moderate opposition in Syria.

EU experts are looking into whether the EU sanctions now need to be tightened up to make it harder for Islamic State fighters to sell oil from Syria, said the European diplomat, speaking on condition of anonymity.

"We are looking into this at the moment, from a legal point of view, how this can be done," he said.

After pressure from EU members including current EU president Italy and France, the bloc's foreign policy chief Catherine Ashton called the extraordinary foreign ministers' meeting for Friday to discuss the conflicts in Iraq and Ukraine as well as Gaza and Libya.

Italy's Foreign Minister Federica Mogherini said the meeting must produce not just a declaration of shared principle on the crises but "a decision on a strong and co-ordinated course of action".

ARMS SHIPMENTS

Ministers will debate how far they can go in supporting Iraqi Kurdish President Masoud Barzani, who has appealed for weapons to help the Kurds fight the militants.

Specifically, they will discuss whether EU governments may send weapons directly to Iraqi Kurds fighting Islamic State militants or must go through the central government in Baghdad.

Decisions on whether to supply weapons are for individual EU governments to make though they must respect EU guidelines.

However, the EU would like to reach a common stance on supplying weapons to the Iraqi Kurds.

Agreement on the subject proved difficult at a meeting of EU ambassadors on Tuesday. Sweden, which does not allow arms shipments to conflict areas, opposed the move, diplomats said.

Some EU governments are concerned that weapons they provided could fall into the hands of Islamic State.

A tortuously-worded compromise hammered out on Tuesday said EU governments could send weapons to the Iraqi Kurds provided they coordinated closely with the Baghdad government and respected the EU's code of conduct on arms exports.

The code of conduct says EU governments will not allow exports that would prolong armed conflicts and must consider the risk that arms could be diverted to terrorist groups.

Several European countries announced on Wednesday plans to send arms or ammunition: France will supply arms "in the coming hours" in response to a request from Iraq's Kurdish leadership, President Francois Hollande's office said.

An obstacle to EU unity on the issue is that the 28-nation bloc has a longstanding arms embargo on Iraq. The only exemptions are for weapons needed by the Iraqi government or by coalition forces that operated there after the 2003 U.S.-led invasion.

EU governments may have to agree to alter the legal text of its arms embargo to permit them to supply the Iraqi Kurds directly.

The United States, which has launched air strikes to try to stem Islamic State's advance, is directly supplying weapons to Iraqi Kurdish fighters. (Additional reporting by Alexandra Hudson in Berlin, Anna Ringstrom in Stockholm and Gavin Jones in Rome; editing by Andrew Roche)